La Mitad del Mundo is a short drive from Quito, Ecuador’s capital city. Sitting directly on the equator, it draws tourists seeking selfies with one foot in the northern hemisphere, and one foot in the southern.
Metaphorically, too, Ecuador could be said to be straddling two opposites. Led by President Rafael Correa since 2007, the country engages with international financiers far more comfortably than regional outcasts Argentina and Venezuela. Yet it does not embrace free markets to the extent seen by its neighbors Colombia and Peru.
Its economic model has borne fruit. The economy has grown above 3.5% every year since 2010. Poverty rates have fallen faster than the regional average, and income is being shared more equally among the population.
Major infrastructure projects have set the ground for a more efficient economy in the years ahead. Ecuador will soon become an exporter of electricity, for example. And more development is planned, including a large-scale refinery that will end the country’s dependence on imported oil derivatives.
Yet in the short term, the country faces a tough year. The collapse of commodity prices is depressing growth forecasts across Latin America. Ecuador is no exception.
Growth in question
The World Bank and IMF still project 3.5% GDP growth this year, but the government is revising down its forecasts. “We think growth will be a little less than that,” President Correa tells LatinFinance. “We still think that the economy will grow at a faster rate than the population — that is, GDP per capital will increase.”
Private shops are more pessimistic. Analytica Investments in Quito estimates growth in the neighborhood of 1.5%. Others are more extreme. Edward Glossop, an emerging markets economist at Capital Economics in London, talks of zero growth, although he admits that is “well below” consensus forecasts.
Ecuador’s export revenue, which had expanded by double digits so far this decade, is set to be flat this year — or even decline.
The smallest member of the Organization of the Petroleum Exporting Countries, Ecuador gets half its export revenues from oil. The government prepared the 2015 budget based on an oil price of $79.70 per barrel. That price was fluctuating between $50 and $60 in the first two months of the year.
What’s more, Ecuador is facing a decline in revenue from other important export sectors, such as flowers and bananas. That is compounded by the fact that Ecuador uses the US currency. The climb of the dollar makes its exports more expensive, especially compared to competitors, such as Colombia, that have witnessed major currency devaluations.
“The problem with the dollar is almost as serious as the oil price,” Correa tells LatinFinance. “It’s like being in a [boxing] ring with one hand tied behind your back.”
CORREA: Welcome, investment
The dollar was adopted by a previous administration nearly 15 years ago and has helped the country maintain macroeconomic stability. Inflation last year was 3.67%, an increase from the previous year, but still among the lowest in the region, according to the National Statistics and Census Institute.
The Institute also reported that its basket of basic goods, which includes families’ most purchased products, was $646.30 per month at the end of 2014, while average family income was $634.67. Although still representing a disparity of more than $10 a month, the chasm between the price of basics and income has narrowed progressively from $26.26 in 2013.
Industries and Productivity Minister Ramiro González says the improvement in purchasing power has been hugely important. “We have managed to guarantee livable wages in Ecuador. The middle class has doubled and purchasing power is strong,” he says.
César Robalino, executive director of the Private Banking Association of Ecuador, says that President Correa has criticized dollarization, but knows it cannot be reversed. “The government is aware that even the hint of abandoning the dollar would have a traumatic effect. Talk a few years ago of a new currency, the condor, created an immediate backlash and use of the dollar was still relatively new. Leaving it now, after 15 years, would not work,” he says.
Indeed, while Correa criticizes the lack of flexibility dollarization imposes on Ecuador’s economic policy, he says it would be almost impossible to abandon it. Instead, the country needs to resort to more creative mechanisms.
“With an exchange rate, if the currency depreciates, imports become more expensive and exports become cheaper. We don’t have that exchange rate, so we have to use, for example, commercial economic policies: tariffs to make imports more expensive, and that generate fiscal revenues with which we can support exports.”
The government announced special tariffs on imports from Colombia and Peru in January. They ended in February amid complaints from the Andean Community trade bloc, but the state plans to unveil a new tariff policy that will apply to all imports.
Prioritizing spending
Based on the projected fall in export revenues, the president announced a $1.4 billion budget cut for 2015 — equal to 1.4% of GDP. Observers applauded the move for its foresight. It came, however, at the expense of Correa’s own belief in the importance of a counter-cyclical fiscal policy, he tells LatinFinance.
The budget cuts focus on capital investment that would end up off shore. “We’ve prioritized public spending that stays in the country, and that makes the economy more dynamic,” President Correa says.
He explains: “It could be for an important project, like a hydroelectric plant. But if the $500 million that I need to spend on the plant goes to turbines that I have to import, this is not the right moment to do that.”
Correa says the country does not plan further cuts, although analysts say they may be necessary.
Alberto Acosta, chief editor with private consulting firm Spurrier Group, says the only way Ecuador is going to grow near the government target is if it secures all the “financing required for 2015. But it is going to be hard for this to happen.”
Come in
As part of its expansion away from oil dependence, Ecuador is upping its tourism profile. The Ministry of Tourism’s annual budget has grown exponentially, from $6 million in 2006 to $90 million this year. A chunk of that went to capture attention in North America with an ad played during the heavily watched 2015 Super Bowl. The spot encouraged viewers to discover a country “like nowhere else”.
Also, organizations including AARP, Forbes, and International Living magazine have put Ecuador at the top of their lists of overseas retirement havens for US expats.
Correa is similarly effusive when discussing investment in Ecuador. “Welcome! To all parts of the country,” he exclaims. “We have clear rules of the game, a sound economy, an honest government, and above all a surfeit of profitable projects. So welcome, investment!”
Correa cautions that foreign investments should also make sense for the country itself — he has no time for reckless profiteering. But options for investment are broad, he insists. Beyond tourism, an obvious opportunity for investment, he says, is agriculture.
“Real investors, real business people — even more, the innovative business people — are more than welcome.”
Meanwhile, Ecuador may directly tap international portfolio investors this year. It has financing agreements in place with other countries and multilateral lenders, and it could also return to the bond market after a successful $2 billion transaction last June.
Correa says the country would consider such a transaction again if the need arises. “We don’t rule out participating again this year,” he says. “Right now we don’t need to — the budget is covered. That includes the maturity of the 2015 bonds.”
State-owned companies, including two oil companies and a power utility, may also consider bond sales.
Long-term view
Some believe that Ecuador’s fiscal deficit will shoot past the government’s target of 5% this year. “Our position is that the deficit this year will be of 6.9% of GDP, and it’s going to be higher, not only because of lower revenues, but because the government will not be able to secure enough financing and will have no choice but to further cut spending,” says Santiago Mosquera, head of research at Analytica.
Correa admits the fiscal deficit is “a little high,” but is set to diminish in the years ahead, he says.
“Before the oil price fell, we told the Ecuadorian people that it was going to be a difficult year. Why? Because we are finishing strategic projects that will change the history of the country.”
But the payoff is near, Correa says. Eight new hydroelectric plants will double Ecuador’s energy production capacity, making the country a net exporter of power and ending the import of subsidized fuels.
Savings in the energy bill will top $1 billion annually. That is set to trim the deficit to 3% next year, 1% in 2017, and balance the budget from 2018. Those targets may slip a little given the international context, says Correa. But the trend will remain.
“We had already planned to have a slightly high deficit, but for strategic projects,” he says. “So it’s perfectly manageable. The problem is not fiscal, it’s external.” LF